Eighth Circuit Contracts Cases 2011 (Part 2)

Becwood, a Minnesota-based distributor, contracted with Dingxi, a Chinese supplier, to purchase a large amount of organic Kosher inulin. Becwood planned to sell the inulin to Stoneyfield Farm, Inc. for use in yogurt products. Dingxi shipped the product in four separate shipments. Becwood paid for the first shipment in full before its arrival, but then rejected all four shipments claiming that the product was contaminated with mold.

Dingxi recalled the third and fourth shipments before they reached their destination ports and sued in the United States District Court for the District of Minnesota for breach of contract and misrepresentation seeking to recover the full price for shipments two, three, and four. The lower court dismissed Dingxi’s claims relating to the third and fourth shipments but eventually ruled against Becwood with respect to the second shipment.

Dingxi appealed the dismissal of its claims relating to the third and fourth shipments to the Eight Circuit.

The Lower Court Decision

The lower court dismissed Dingxi’s case with respect to the third and fourth shipments because Dingxi failed to allege a difference between the current market price for the rejected goods and the contract price, which was the applicable measure of damages for Dingxi’s claims.

The parties agreed that the United Nations Convention on Contracts for the Sale of Goods (“CISG”) governed the contract. Under CISG article 73(2), if one party’s breach relating to one installment gives the other party grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future installments. After receiving allegedly contaminated goods in the first two shipments, Becwood invoked its rights under article 73 with respect to shipments three and four.

The aggrieved party’s damages when a contract has been avoided are the difference between the contract price and the current price at the time of avoidance as provided under CISG article 76. Because Dingxi didn’t allege a difference in the current market price and the contract price for the goods, the lower court held that it had failed to assert cognizable damages and dismissed Dingxi’s claims relating to the third and fourth shipments.

The Appellate Decision

The Eighth Circuit agreed with the district court that it was unlikely that an aggrieved seller in Dingxi’s position would be able to recover the full contract price for the third and fourth shipments, which is what Dingxi sued for. But the court noted that if Dingxi could prove breach of contract, it would be entitled to some monetary relief, even if not the full contract price. Under the Federal Rules of Civil Procedure, however, a court may dismiss a complaint pursuant to Rule 12(b)(6) (which applied in this case), only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations. Accordingly, the Eighth Circuit reversed the district court’s dismissal of Dingxi’s complaint with respect to the third and fourth shipments and remanded the case to the lower court.

In Simmons Foods, Inc. v. H. Mahmood J. Al-Bunnia & Sons Co. the Eighth Circuit observed the separate corporate entities of two related companies and refused to compel arbitration when one of the companies had not agreed to binding arbitration.

The Note and Supply Agreements

Simmons Foods, Inc. (“Simmons”) and Simmons Prepared Foods, Inc. (“Simmons Prepared”) entered into a supply arrangement with Middle East Frozen Foods (“MEFF”) and Middle East Frozen Foods Iraq, LLC (“MEFF Iraq”). Under the arrangement, Simmons was to produce American-made halal frozen chicken for MEFF and MEFF Iraq to distribute to the Iraqi market. The arrangement involved a note under which MEFF promised to pay Simmons about $2.5 million. The balance of the note was to be reduced by the amount of payments received by Simmons from MEFF Iraq under a supply agreement. The only parties to the note, which contained a binding arbitration provision, were Simmons and MEFF.

Simmons Prepared and MEFF Iraq entered into a series of supply contracts under which MEFF Iraq was to pay Simmons Prepared for product, but payment was to be made to a Simmons bank account. The supply contracts did not contain an arbitration provision.

The Dispute

When MEFF allegedly defaulted on the note, Simmons and Simmons Prepared sued MEFF and MEFF Iraq, along with other entities, alleging claims under both the note and the supply contracts. The defendants moved to compel arbitration. The parties (and the lower court) agreed that the dispute with MEFF over the note should proceed in arbitration, but they disagreed whether the claims under the contracts should be arbitrated. The lower court (the United States District Court for the Western District of Arkansas) denied the defendants’ motion to compel arbitration of the claims relating to the supply agreements.

On appeal the defendants argued that the note’s arbitration clause should apply to the dispute over the contracts. The problem for the defendants was that Simmons Prepared was not a party to the note, the only document that contained an arbitration provision. As the Eighth Circuit stated, a party who has not agreed to arbitrate a dispute cannot be forced to do so.

The defendants put forth an agency theory, but the only evidence of agency was Simmons’s handling payments from MEFF Iraq on Simmons Prepared’s behalf. The court stated that the defendants failed to show that Simmons’s money-handling function included the authority to bind Simmons Prepared to arbitration.

As to the defendants’ third-party beneficiary theory, the court held that Simmons Prepared was not a third-party beneficiary under the note stating, “The note’s terms benefit only Simmons; the note lists no other beneficiaries; and the defendants present no evidence that the note proceeds were used to benefit a family of companies.”

The Eighth Circuit refused to bind Simmons Prepared to the arbitration provision contained in the note.